China’s Weakening Property Markets and FDI flows Spurs More Promises of Policy Steroids

Day in day out, flows of negative news from China seems to be worsening.

China’s property ownership restrictions may partly have influenced the unfolding weaknesses in China’s real estate markets.

From Bloomberg,

Shanghai last year started limiting locals to owning two homes, while families among the city’s 9 million non-local residents were capped at one. Unmarried non-locals, who had been able to buy as long as they proved a year or more of tax payments, are now being frozen out altogether after the city toughened implementation of the curbs following Chinese Premier Wen Jiabao’s vow in July to “unswervingly” contain prices.

Chinese males are expected to own a home before they approach their would-be wife’s family for approval to wed. In rural parts of the country, parents extract most of the family’s wealth to build houses for their sons ahead of the marriage; in cities, securing an apartment is the equivalent.

New-home prices in China fell for nine straight months through May as government restrictions achieved the goal of cooling the market, according to SouFun Holdings Ltd. (SFUN), the country’s largest real estate website owner. In July, values bucked the trend, posting the biggest gain in more than a year, SouFun said Aug. 1.

“China’s property policies will definitely focus on those first-tier landmark cities,” said Alan Jin, a Hong Kong-based property analyst at Mizuho Securities Asia Ltd. “If all the current curbs are not working, the government may have to be more hawkish in the second half. Their bottom line is to stop prices from rebounding.”

After stricter implementation of its curbs, Shanghai’s new home sales fell 16 percent in July from a month earlier to 7,025 units, according to data from Century 21 China Real Estate, the country’s second-biggest property brokerage. Sales had surged 24 percent to 8,365 units in June, the highest in 17 months.

“The policies did have some impact on the market,” said Huang Hetao, Shanghai-based researcher at Century 21.

China’s second-largest city by population, Shanghai had about 23 million residents at the end of 2010, about 9 million of whom were non-locals, according to the nation’s statistics bureau. An influx of construction, information technology, and other workers almost tripled the cost of homes in Shanghai in the past 10 years, according to government data.

Foreign investors has also exhibited signs of apprehensions over China’s economy as reflected by the recently released figures on Foreign Direct Investments (FDI)

From another Bloomberg article,

Foreign direct investment in China fell to the lowest level in two years in July, fueling concern that waning confidence in the nation’s growth prospects may restrain any economic rebound

Investment declined 8.7 percent from a year earlier to $7.58 billion, the eighth drop in nine months and the smallest inflow since July 2010. The Ministry of Commerce released the data at a briefing in Beijing today.

Chinese financial institutions sold a net 3.8 billion yuan ($600 million) of foreign currency last month, indicating capital is flowing out as property curbs and weakness in exports slow growth and the yuan weakens.

China’s slowdown may extend into a seventh quarter after export growth collapsed in July and industrial production and lending missed economists’ forecasts. The nation reported a $71.4 billion capital account deficit in April-through-June, the biggest quarterly shortfall in data going back to 1998…

“In the second half, China’s foreign trade and export situation will be more grim, there will be more difficulties, harder tasks, and the pressure of achieving the full-year target will be bigger,” Shen Danyang, spokesman for the commerce ministry, said at today’s briefing. The country aims for 10 percent growth in trade this year.

Contrary to the traditional reactions where negative news would equate to negative sentiments as reflected on deteriorating markets, the constant flow of seemingly adverse developments have instead bolstered expectations of a soon to be implemented grand bailout from the Chinese government and or her central bank.

Such expectations are being fed by politicians, media and steroid starved asset markets participants.

From another Bloomberg article,

Chinese Premier Wen Jiabao said easing inflation allows more room to adjust monetary policy and positive signs are emerging in the economy, expressing confidence after July data showed a further slowdown in growth.

“We have the conditions and capabilities, and will be sure to fulfill this year’s economic and social development targets,” Wen said during a two-day inspection tour to the eastern province of Zhejiang, the official Xinhua News Agency reported yesterday. He said downward pressure on the economy remained “relatively large,” according to state radio, and state television reported him as saying there’s “growing room for monetary policy operation.”

The comments may bolster speculation China will cut banks’ reserve requirements or benchmark interest rates again after inflation slowed to a 30-month low in July, export growth collapsed and new yuan loans trailed estimates. Zhejiang, an export base, is among the hardest-hit regions by the economic slowdown.

China’s politicians have increasingly resorted to the talk therapy in attempting to manage the sentiments or the ‘animal spirits’ of the markets. Yet this, for me, are signs of the ongoing political deadlock as China’s election seasons nears and a highly fragile environment.

Promises have been meant to be broken is the convention when it applies to politics.

Thus relying on promises from politicians can be dangerous and costly to the health of one’s portfolio.

Be careful out there.

War on Short Selling: Price Controls Fail

Prohibition in terms of market transactions or via short selling fails.

From Wall Street Journal’s Real Time Economics Blog

New research supports the notion that instituting temporary short-selling bans during stock market downturns doesn’t do any good.

This might not seem like shocking news to those who believe you have to let market forces play themselves out, even in volatile times, and to those who distinguish between the impact of short selling, the borrowing of shares with the expectation of buying them later at a lower price, and flat-out selling.

Nonetheless, the regulatory bans go on. Just last month, temporary short-selling bans of sorts were put in place in Italy and Spain.

In this latest look at short-selling bans, Federal Reserve Bank of New York economist Hamid Mehran teamed with Robert Battalio and Paul Schultz, both of whom are finance professors at the University of Notre Dame.

Harkening back to the dark days of the financial crisis in the U.S., they studied the two-week ban on short selling of financial stocks that was imposed in 2008 in a futile attempt to stop the massive sector bleeding.

“The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly…and stabilized once it [the ban] was lifted,” the economists wrote in the latest issue of the New York Fed’s Current Issues in Economics and Finance.

And lest you think this tilting at windmills by banning short sales is a harmless sort of regulatory exercise by perplexed officials in the midst of a crisis, the trio begs to differ.

“If anything, the bans seem to have unwanted effects of raising trading costs, lowering market liquidity and preventing short sellers from rooting out cases of fraud and earnings manipulation,” the economists write.

The real goal of the trading bans is to establish price controls.

Regulators pass the proverbial hot potato (shift the blame) of policy failures or has been scapegoating the markets.

Regulators want to project of “do something” actions, no matter how these would only make the matters worse through “unwanted effects”.

“The regulatory bans go on”, is an example where in the world of politics, doing the same thing over and over and expecting different results has been the convention. That’s because political agents don’t get sanctioned for their decision mistakes which has widespread longer term implications.

On the contrary, regulators use market’s volatility as excuses to curb on people’s property rights, and importantly, to expand their control over the marketplace. This is why the idea that crises may have been premeditated cannot be discounted because political agents see these as “opportunity to do things you think you could not do before”

Political authorities also fantasize about using edicts to banish the natural laws of demand and supply to oblivion. Theories, history and or experience seem to have no relevance in the world of politics.

Importantly the tactical “do something” operations have barely been about the “public goods” but about saving their skins and of their cronies.

Of course, price controls can also come in indirect forms like central bank’s zero bound rates, quantitative easing and the operation twist (manipulation of the yield curve) and or other forms of interventionism (e.g. changing of the rules).

Even the classic Pavlovian mind conditioning communication strategies (signaling channel) employed by political institutions have had distortive effects on the marketplace.

The popular attribution of today’s recovery in the US equity markets looks like a nice example.

From Bloomberg,

The Standard & Poor’s 500 Index (SPX) rose for a sixth day, the longest rally since 2010, amid speculation the Federal Reserve will pursue more stimulus measures. Treasuries rose and commodities fell as Chinese and French data added to signs the global economy is slowing…

“The weaker the data, the higher the likelihood of stimulus from central banks,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion. “The weakness in China is likely to prompt a move there,” he said. “While the Fed has been clear it will do anything to support growth, some people tend to think it’s inevitable.”…

“Whilst markets have recently been rallying on bad news -- in the expectation that it will lead to further stimulus from the central banks -- the deterioration in the fundamentals is becoming a bit harder to ignore,” said Jonathan Sudaria, a trader at Capital Spreads in London. “Traders may be disappointed if their thirst for stimulus isn’t satiated as soon as they expect.”

See bad news is once again good news.

The public’s mindset has continually been impressed upon or manipulated to expect of salvation from political actions.

Central banks of major economies have more than doubled the size of their balance sheets (chart from cumber.com) yet the global debt crisis has not only lingered but has been worsening.

Interventionism through price controls have basically reduced the financial markets into a grand casino, which has tilted to benefit cronies while at the same time has vastly reduced or narrowed people's time orientation.

All these merely validates what the great professor Ludwig von Mises warned, (italics original)

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.

At the end of the day, economic reality will expose on the quackery of interventionism.

Divergences: US Stock Markets Rally Amidst Weakening Market Breadth

Stockcharts.com regular weekly contributor Carl Swenlin of Decision Point thinks, as I do, that the recent rally of the S&P 500 has been poorly supported by market breadth.

Last night I wrote,

the strong Friday rally in the US stock markets may not be that convincing as market internals reveals of a “narrowing breadth” or declining participation of gains by key index issues. This means that the large gains posted by the S&P 500 have been mostly concentrated to a few index heavyweights.

Pardon me, I may be seen as guilty of confirmation bias (looking for views in support of my belief), but Mr. Swenlin’s post, as excerpted below, appears as somewhat a detailed validation to my claim above.

The “unhealthy rally” can be seen from Mr. Swenlin’s own constructed index "Blue Chip Top 10 Index”.

The index according to Mr. Swenlin (via stockcharts.com; bold original) is constructed

by calculating the daily change of the Index as being the daily average percent change of the securities in the Blue Chip Top 10 list. Stocks are tracked from the day after they enter the Top 10 list through the day they drop off the list.

The Top 10 Index is equally weighted, so theoretically one could only replicate the performance of the list with real money by reallocating an equal amount to each stock each day (and somehow avoid transaction fees in the process). More to the point, the Top 10 list are a good place to look for securities that will out-perform the market, but it will be impossible for you to duplicate the Index. You could also lose a ton of money if you are long these top ranked securities during an extended market decline.

Mr. Swenlin concludes:

In spite of upward movement of the SPX, the Blue Chip Top 10 Index tells us that the leadership of the market has been rotating too rapidly, which suggests confusion and weakness. By the time a stock reaches the Top 10, it loses momentum and drops right back out again. This is evidence that for a long time the internal condition of the market has been turbulent and confusing, in spite of generally rising market prices.

In contrast to my expectations, it’s even surprising to see that other stockcharts.com contributors as having an antsy outlook, because like Mr. Swenlin, they also have taken note of others signs of divergences between the performance of the US major bellwether S&P 500 and other indices (e.g. Russell 2000 vis-à-vis S&P 500: See Tom Baley).

Such murky outlook are simply consequences of distortions from political talk therapy (verbal interventionism through Pavlov’s conditioning and or Central banking signaling channel) aimed at artificially propping up of markets—mostly by surreptitiously assailing short sellers.

Explaining Super Mario’s Trifecta

The Buttonwood’s Notebook columnist (Philip Coggan) of the Economist provides a presumable explanation of last week’s rally following ECB Prez Mario Draghi’s pledge to do “Whatever it Takes to Save the Euro”

AN interesting note from the always-perceptive Dhaval Joshi at BCA Research shows that July was a remarkable month. It was the only month in the last 400 in which European stocks, the German 10-year bund and gold rallied by more than 2.5%. Even when Mr Joshi uses a lower 2% hurdle, the last simultaneous rally on this scale was February 1987, and there have been only seven such months in the last 30 years.

Normally, you would expect the conditions for a simultaneous rally to be rare. Inflation would be good for gold and bad for bonds; a recession would be good for bonds and bad for equities and so on.

Super Mario was partly responsible for July's trifecta with his promise to do whatever it takes to save the euro. Equities rallied on the hope that Europe's economy would avoid a catastrophe; gold rallied because the ECB would likely create money; and bunds rallied because the ECB would save all the costs of Spanish rescue from falling on the German taxpayer. or at least that is a plausible explanation, based on the fundamentals. An alternative is that this was a risk-on rally in which investors moved money out of cash and into any likely asset class.

I may add a more important dimension to the above explanation: shorts had been deliberately set up for the ambush

One example: Euro shorts collapsed by 10% in one week and 35% in one month.

Notes the Zero hedge,

And where two months ago, the net short position in the EUR hit an all time record, north of -200K contracts, in the interim this number has contracted by over a third, and as of minutes ago was revealed to be "just" 139K in the week ending July 31, a 10% drop in shorts in one week. Why is this important? Because while short covering rallies have long been yet another narrative to keep shorts on the sidelines, the probability of such an event has declined dramatically now that the bulk of the weak hands have been kicked out, and the net exposure is back to January 2012 levels.

Underneath all the supposed noble sounding rhetoric to save the Euro, interventionism has mostly been about price controls or the manipulation of markets.

PIMCO’s Mohamed El-Erian: “Frightening” Global Synchronized Slowdown

Mohamed El-Erian of PIMCO, one of the top investment firms with more than $1.7 trillion of managed funds, has been apprehensive with current global economic conditions.

From Bloomberg,

Pacific Investment Management Co.’s Mohamed El-Erian called recent declines in purchasing manager indexes in Europe and Asia “frightening” and said the world economy is suffering its severest slowdown since the global recession ended in 2009.

El-Erian, who is chief executive officer of the Newport Beach, California-based Pimco, predicted global growth of 2.25 percent over the next 12 months. That’s down from the 3.9 percent in 2011 and 5.3 percent in 2010 recorded by the International Monetary Fund. The world economy contracted 0.6 percent in 2009.

“This is a serious, synchronized slowdown,” El-Erian said in an interview today.

His forecast highlights the troubles the global economy is facing as the euro area struggles to contain its debt crisis and growth in the U.S. and China slows. Separate surveys of purchasing managers released yesterday showed manufacturing in the 17-nation euro area shrinking by the most in 37 months while Chinese factories teetered on the edge of contraction.

Mr. El-Erian shares my concern about the huge uncertainty which beclouds the global economy.

The growing risks of global recession, in my view, has been brought about by political gridlocks in major economies, aside from tentative central bankers who seem to have shifted to Public Relations work to manage the public’s expectations than from taking real actions.

Considering that global financial markets and economies have become heavily dependent on central banking steroids, the dearth of these only brings to the surface all the misdirected investments which only magnifies the bubble busting conditions.

Below is a list of the factory activities of some of the major economies of the world. Table from the Wall Street Journal Blog

About 70% of the global factory activity index has been in contraction, this includes all G-7 economies.

To add, over the past three days, news seems to be getting a lot bleaker.

Taiwan’s economy contracted in the three months which ended in June (BBC).

Japan’s industrial output fell for the third straight month. (BBC)

South Korea’s factory index sank the most in seven months in July (CNBC)

US consumer spending slips in June (Northern Trust)

US Manufacturing contracts for the second month in a row (Zero Hedge)

This morning, China’s non-manufacturing industries expanded at a slower pace in July as new orders and outlooks for future business slipped, an official survey indicated (Bloomberg)

This seems congruent to the recent decline of China’s Manufacturing Index which seems at the brink of contraction (Bloomberg)

Be careful out there.

More Promises from ECB’s Mario Draghi and the US Federal Reserve

Central bankers continue to engage in talk therapy or jawboning the markets or manipulating the public's expectations in the hope that promises to inflate may be enough to rejuvenate the “animal spirits”.

From Bloomberg,

European Central Bank President Mario Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan.

ECB bond purchases would likely focus on shorter-term maturities, would be conducted in a way to soothe investors’ concerns about seniority, and wouldn’t breach European Union rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt today. ECB officials are working on the plan and details will be fleshed out in coming weeks, he said.

“Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner,” Draghi said at a press conference after keeping the benchmark interest rate on hold at 0.75 percent. “The euro is irreversible.” There is a “severe malfunctioning” in bond markets, he said.

This seems little different from the US Federal Reserve which has deferred from taking on more stimulus but gave a strong signal that such contingency would be used in case the economy deteriorates further.

From an earlier Bloomberg article,

The Federal Reserve said it will pump fresh stimulus if necessary into the weakening economic expansion to boost growth and reduce an unemployment rate that’s been stuck at 8 percent or higher for more than three years.

The Federal Open Market Committee “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” it said today in a statement at the end of a two-day meeting in Washington. “Economic activity decelerated somewhat over the first half of this year.”

So far markets have held on well to such promises, although as I previously admonished, eventually markets will seek the real thing.

should markets continue to rise in ABSENCE of REAL actions from central bankers, we cannot rule out that the markets could fall like a house of cards (fat tail risks) or what I would call a Dr. Marc Faber event.

The market’s deep addiction to stimulus will eventually seek REAL stimulus more than just promises or in central bank lingo, signalling channel. Reversal of expectations can become violent.

Such opaqueness in policy directions only underscores the uncertainty of the financial marketplace which only amplifies the risks of sharp volatilities.

Be very careful out there.

The Magic of Central Banking Talk Therapy

The prospects of central banking inflation steroids bring hope to the forefront.

From Bloomberg,

The Dow Jones Industrial Average (INDU) climbed above 13,000, capping its longest weekly advance since January, amid speculation the European Central Bank will buy bonds to help lower borrowing costs and preserve the euro…

American stocks joined a global rally after two central bank officials said ECB President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases. German Chancellor Angela Merkel and French President Francois Hollande echoed yesterday’s pledge by Draghi that they will do everything to protect the euro.

Bad news is good news: economic slowdown signifies as fodder for central bank support. More from the same article

Chart from tradingeconomics.com

In the U.S., data showed that the economy expanded at a slower pace in the second quarter as a softening job market prompted Americans to curb spending. Consumer confidence in July dropped to the lowest this year, according to a separate report. Cooling growth makes it harder to reduce unemployment, helping explain why Federal Reserve Chairman Ben S. Bernanke has said policy makers stand ready with more stimulus if needed.

“Growth has decelerated sharply,” said Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees $355.9 billion. He spoke in a telephone interview. “We need something to reverse that downtrend and that ‘something’ is policy.”

Consumers are cutting back just as Europe’s crisis and looming U.S. tax-policy changes dent confidence, hurting sales at companies from United Parcel Service Inc. to Procter & Gamble Co. Sales at almost 60 percent of S&P 500 (SPXL1) companies which reported second-quarter results missed estimates, data compiled by Bloomberg show. Still, 72 percent beat profit forecasts.

US equity markets have also been climbing amidst falling growth of money supply...

chart from St. Louis Fed

...also amidst declining forecasts or expectations for corporate earnings...

Dr. Ed Yardeni notes

As a result, the 2012 and 2013 estimates are at new lows of $104.11 and $116.41, respectively. These numbers imply earnings growth rates of 6% this year and 12% next year. They may still be too optimistic since revenue growth is likely to be closer to 5% during 2012 and 2013, while profit margins are likely to remain flat over this period.

Well, all these goes to show how financial markets, desperately seeking yields, have become ‘dopamine addicts’.

Douglas French at the Laissez Faire Books explains,

…cheap money combined with the herding animal spirits is a certain cocktail to engender bubbles. Tragically, these booms are followed by the inevitable busts, creating regret that is the difference in investors minds between the value of what is and the value of what could have been.

This is important because of dopamine, which is a chemical in the brain that helps humans decide how to take actions that will result in rewards at the right time.

People don’t get a dopamine kick when they get what they expect, only when they make an unexpected windfall. So, as Jason Zweig writes in Your Money and Your Brain, drug addicts crave ever-larger fixes to achieve the same satisfaction and “why investors have such a hankering for fast-rising stocks with ‘positive momentum’ or ‘accelerating earnings growth’.”

Also, dopamine dries up if the reward you expected fails to materialize.

The brain has 100 billion neurons and only one-thousandth of one percent produce dopamine, but “this minuscule neural minority wields enormous power over your investing decisions,” cautions Zweig.

Dopamine takes as little as a twentieth of second to reach your decision centers, estimating the value of an expected reward and more importantly propelling you to action to capture that reward. “We’ve evolved to be that way,” explains psychologist Kent Berridge, “because passively knowing about the future is not good enough.”

The effect of all this is what Zweig refers to as “the prediction addiction.” Humans hate randomness. We want to predict the unpredictable, which originates in the dopamine centers of the reflective brain, according to Zweig, leading humans to see patterns where none really exist…

The attempt to satisfy the dopamine which has been evoked by central bank policies, leads people to become increasingly more dependent on heuristics based thinking

More from Mr. French

We all tend to constantly feed our confirmation biases, seeking out experts that confirm our view of the world. We read writers that we agree with so that we can feel smarter, while ignoring or dismissing opinions different from our own.

Our brains are great for keeping us alive in the jungle. We look for patterns and motion. These instincts kept the cavemen alive, not to mention Wall Street’s technical analysts, but wreck the portfolios of investors.

Investors love a good story, but are vulnerable to anecdotes that mislead us, says Ritholtz.

No wonder markets are not sources of information, but instead sources of misinformation, according to resource investing guru Rick Rule…

“The information that people derive from markets is spectacularly wrong,” says Rule, a devotee of legendary investor Benjamin Graham. Like Graham, Rule looks for undervalued stocks and only wants to buy them when they are on sale. Quoting Graham, Rule says, “markets in the short term are voting machines, while in the long term they are weighing machines.”

Housewives are much more rational buying groceries than investors are in buying stocks. While a housewife will turn her nose up at expensive tuna fish, she will load up on it once it goes on sale. Conversely, her investor husband, in Rule’s story, is happy when the share price of his favorite stock goes up and he buys more. When the share price falls, he doesn’t buy more, as his wife does with tuna fish, but instead sells out in disgust.

In short, stock markets (and the financial markets) have been in disconnect with reality. Promises have been taken as facts.

Equity markets have mostly priced in prospective central banking support via QEs…

chart from Zero Hedge

The question now is how sustainable will this talk therapy rally be? Will talk therapy be enough to reinforce the current reanimated 'animal spirits' and filter into economic reality? What if central banks don't deliver as the markets expect?

P.S. I won’t be making my regular stock market commentary tomorrow.

HOT: ECB’s Draghi: ECB Will Do What’s Needed To Preserve Euro

Steroid starved financial markets suddenly found life from promises of more inflationism.

From Bloomberg,

European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”

Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds. Spanish politicians have called on the ECB to do more after yields on the country’s bonds soared to euro-era records this week.

Spanish yields slumped after Draghi’s remarks, with the rate on the 10-year bond dropping 32 basis points to 6.98 percent at 1:26 p.m. in Madrid. It touched a record 7.69 percent on July 22. The euro jumped and stocks rose. The single currency climbed as high as $1.2285 after trading at $1.2118 before Draghi spoke. The Stoxx Europe 600 Index (SXXP) gained 1.6 percent.

Bad news once again is read as good news…that’s until markets wakes up to the reality of either empty promises or real action—meant to buy time before the day of reckoning arrives.

Will China Ease Banking Curbs? Has the Railway Stimulus been Launched?

China’s worsening slowdown has been prompting for a stream of news pouring out this morning.

One should note that the Shanghai Index broke down yesterday, but has opened mixed (slightly higher) today.

Yesterday I asked,

will China's policymakers ease on bank capital regulations?

I guess the initial indications points to the easing of restrictions on China’s shadow banking system perhaps as part of the proposed stimulus

Here is the Bloomberg,

China’s economic slowdown threatens to derail efforts to curb underground lending -- measures championed by Premier Wen Jiabao as crucial to future growth.

The country grew in the second quarter at the slowest pace since the depths of the global financial crisis in 2009, 7.6 percent, putting pressure on China’s leaders to boost stimulus spending. Wen’s proposals to rein in the shadow-banking system, estimated to be about one-third the size of official lending, may be sidelined as a result, according to half a dozen economists interviewed by Bloomberg News.

“With an economy slowing more aggressively than the authorities perhaps want, the imperative to crack down on shadow financing becomes increasingly conflicted,” said Alistair Thornton, a Beijing-based economist with research firm IHS Global Insight Ltd. (IHS) “With the government increasingly in firefighting mode, the desire to push through tough reform in the financial sector inevitably takes a back seat to staving off a hard landing and managing global economic volatility.”

Wen, whose term ends next year, has led calls to control what IHS estimates is $1.3 trillion of private financing, an amount equal to last year’s U.S. budget deficit. He has proposed channeling that money through government-regulated institutions to break what he called a “monopoly” on lending by state-owned banks and open a cascade of capital to China’s 42 million small and medium-sized businesses.

‘Terrible Damage’

Only 3 percent of those companies are able to get bank loans, according to Citic Securities Co. (6030), the nation’s biggest publicly traded brokerage, with underground lending by family, friends and acquaintances largely funding the rest.

If and when this becomes a reality, then this does nothing to solve the problem of systemic overleveraging, and in fact, should worsen it. What Chinese authorities are likely to do like their developed economy peers is to inflate aggressively.

Another Bloomberg article also says that China may have already launched a railway based stimulus.

China’s railway infrastructure investment may double in the second half of this year from the first six months, aiding efforts to reverse a slowdown in the world’s second-biggest economy.

Full-year spending will be 448.3 billion yuan ($70.3 billion), according to a statement dated July 6 on the website of the National Development and Reform Commission’s Anhui branch. That indicates about 300 billion yuan of investment in the second half, up from about 148.7 billion yuan in the first.

China’s fixed-asset investment has already started to pick up and a jump in spending on railway construction would echo the stimulus rolled out during the global financial crisis. A decline in foreign direct investment reported by Vice Commerce Minister Wang Chao in Hong Kong yesterday underscored the toll that Europe’s debt woes and austerity measures are taking on Asia’s largest economy.

In my view, both are signs of the growing desperation by the Chinese authorities, who may trying to offset adverse market developments with public relations work.

None of the above seems to have been made official yet. “May be sidelined” or “may double” seem like the psychological power of suggestion.

The recourse to managing public communications or public relations campaign seem as manifestations of the ongoing political deadlock within the Chinese political system

This means that, so far, political actions has mostly been about promises or “talk therapy”.

The frictions from the clash of hope and reality will likely produce more market volatilities in either direction over the interim but enhances the risks of a fat tail event (crash).

Be careful out there.

Bad News is Good News: US Manufacturing Activity Contracts

Signs of economic slowdown has percolated to the US, but global stock markets remain buoyant.

From Bloomberg,

Manufacturing in the U.S. unexpectedly shrank in June for the first time since the economy emerged from the recession three years ago, indicating a mainstay of the expansion may be faltering.

The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.

Treasury yields fell on concern Europe’s debt crisis and a slowdown in Asia are taking a bigger toll on the world’s largest economy and hurting manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) Assembly lines are at risk of slowing further as consumers temper purchases and companies cut back on investment…

The ISM index, which dropped to its lowest level since July 2009, was less than the median forecast of 52 in the Bloomberg survey. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.

No Recession

Today’s reading is well above the 42.6 level that generally indicates the economy as a whole is expanding, according to ISM…

Manufacturing is also weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.

No worry, bad news has never been a problem as central banks are expected to ride like the fabled knights to save the damsel in distress.

From another Bloomberg article,

Japanese and Australian stock futures rose on expectations that a contraction in U.S. manufacturing may encourage the Federal Reserve to ease monetary policy as the European Central Bank cuts interest rates to help contain the region’s sovereign-debt crisis.

Yet another article from Bloomberg,

Asian stocks climbed for a fifth day, the longest rising streak on the regional benchmark index since March, on expectations that central banks from Washington to Frankfurt may ease monetary policy to spur economic growth…

“The prospect for central banks easing policy gives us a good setup for equity markets globally,” said Mikio Kumada, a global strategist in Singapore at LGT Capital Management, which manages more than $20 billion globally…

The weakness in manufacturing may encourage more accommodative policies from the Federal Reserve, Princeton University economist Alan Blinder said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Scarlet Fu.

The mantra of money printing as the Holy Grail have always been popular. As the great Professor Ludwig von Mises observed

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last

Yet 5 years of sustained inflationism have only worsened the crisis.

Inflationism is like religion, it is based on faith.

Absent real actions, until when can stock markets rise on mere ‘talk therapy’ or on expectations that central banks will deliver the ‘Bernanke PUT’? When will reality collide with hope?

Be careful out there.

Central Bankers Talk Doom, Markets Surge

You’ve got to hand it central bankers for deftly using scare tactics to drive up the markets

This from a Bloomberg article entitled Central Banks Warn Greek-Led Euro Stress Threatens World

Central banks intensified warnings that Europe’s failure to tame its debt crisis threatens to roil the world’s financial markets and economy as Greece’s election in two days looms as the next flashpoint for investors.

Monetary policy makers from the U.K. to Japan and Canada sounded the alert about potential fallout from the single currency bloc’s troubles. They spoke as Group of 20 leaders prepare to meet in Mexico next week amid the weakest international economy since the 2009 recession.

A victory by Syriza, the party that promises to renege on Greece’s end of the bailout deal, could speed the nation’s exit from the euro. Absent a quick fix from divided European governments, central bankers may have to engage in fresh crisis- fighting of their own to ensure markets operate and their economies grow if the election jolts investors. Spain’s 10-year bond yield vaulted to 7 percent yesterday in a fresh sign of the stress that has plagued the region for two years.

The crisis has created a “large black cloud of uncertainty hanging over not only the euro area, but our economy too, and indeed the world economy,” Bank of England Governor Mervyn King said in London late yesterday.

‘Major Shock’

Canada faces a “major shock,” and global financial conditions could deteriorate significantly if Europe’s crisis worsens, the country’s central bank said yesterday. Bank of Japan (8301)Governor Masaaki Shirakawa said June 13 that the euro area poses the biggest challenge to the world’s No. 3 economy. The BOJ today kept monetary policy unchanged, while saying it will be giving “particular” attention to global market developments.

So when has DOOM become POSITIVE for markets? Well that’s when markets have been PROMISED to be defended with a tsunami of STEROIDS

Here are some examples:

Bank of England proposes £140 billion rescue plan

From the Telegraph

George Osborne unveiled a £140 billion emergency scheme to try to avoid a second credit crunch caused by the ongoing chaos in the eurozone.

The Bank of England is to offer money to high-street banks to kick-start mortgage and small business lending to prevent loans being rationed for many families and entrepreneurs, the Chancellor announced.

It comes after sharp rises in the costs of mortgages and other loans in recent months as banks struggle to raise money in the midst of the single currency crisis.

Bloomberg on last night’s positive reception of US markets on the alleged doomsday

Expectations for global policy action grew as central banks intensified warnings that Europe’s failure to tame its crisis threatens the economy. European Central Bank policy makers have overcome a key concern about taking the benchmark rate below 1 percent, two euro-area central bank officials said. The June 17 vote will turn on whether Greeks accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk becoming the first to exit the 17-member currency.

Fed Action

Stocks also rose on speculation the Federal Reserve may join central banks in taking steps to boost growth. Data today showed that industrial production unexpectedly fell and consumer confidence slid, adding to evidence of U.S. economic weakness. U.S. policy makers meet June 19-20.

Of course, flooding the world with money would not be sufficient, central bankers would need to ensure an easing of regulatory conditions to make the credit environment conducive, e.g. lighten up on collateral requirements

From Marketwatch.com

International regulators are on the verge of easing new banking rules that are meant to help the safety of the financial system, the Wall Street Journal reports, citing unnamed sources. Some of the regulators apparently worry that forging ahead with the new requirements could actually make the European financial meltdown worse, the newspaper noted. So, the new plan is to make it easier for the industry to comply with requirement that lenders keep on hand enough liquid assets to weather market plunges or other disasters.

To preserve the current system, central bankers should be expected to INTENSIFY the use of steroids—which do not really help anyway and actually worsen it—in order to postpone what is truly inevitable.

Today’s markets have increasingly been anchored or hostaged on expectations of huge infusions of steroids. This implies that FAILURE to please or satisfy such expectations would lead to tremendous or outsized volatilities.

Nonetheless central bankers have, in reality, been using the crisis to expand political control over their constituents

As the great libertarian H.L. Mencken once said,

The urge to save humanity is almost always a false-face for the urge to rule it.

Be very careful out there.

Talk Therapy boost US Markets

Again US stocks reportedly rose on chatters of the US Federal Reserve rescue.

From Bloomberg,

U.S. stocks advanced, erasing a weekly loss for the Standard & Poor’s 500 Index, amid reports policy makers may take steps to assist economies battered by Europe’s sovereign debt crisis…

Stocks extended gains today amid reports of plans by central banks. Bloomberg News reported that U.K. Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit. Reuters said that central banks are prepared to take action if needed to boost liquidity in financial markets if the Greek elections cause tumultuous trading, citing officials linked to the Group of 20 nations.

Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.

‘Good Stage’

“Good inflation data and weak employment is a good stage for a Fed policy response,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in an e-mail. “We are at the stage where bad news is good news in terms of a policy response. Jobs will be the critical factor that influences the Fed.”

Imagine “bad news-is-good news” because of the prospects of rescues? That’s how distorted markets are today. Yet until what point will the market simply imbue all talks, with no actions? This is simply addiction.

And because the Fed’s talk therapy (signaling channel) seems have accomplished more than the implemented policies of QEs or Operation Twist, indecision or policy procrastination maybe a (deliberate) decision.

Bloomberg columnist Caroline Baum explains, (bold emphasis mine)

All it took was a lousy employment report and news that Spain’s banks were in the ICU to slice the yield on the 10-year Treasury note to a record low of 1.43 percent on June 1, a 30-basis-point decline for the week. The market accomplished in a matter of days what the Fed couldn’t in nine months and $400 billion of curve-twisting operations.

I suspect we are two events away from a 1 percent yield on the 10-year note and a flatter curve. All it would take is another weak employment report and a Greek exit from the euro zone to send investors rushing for the safety and security of U.S. Treasuries. And no, those buyers aren’t expecting to earn a positive return during the next 10 years.

Compromised Compass

In the old days, the spread provided a timely reading on the economy’s health by juxtaposing a Fed-pegged short-term rate with a market-determined long-term rate. The market rate served as a kind of check on Fed policy.. Why would the Fed want to compromise a good compass and reduce the incentive for banks to lend?

The argument for additional curve-twisting rests on the idea that lowering long-term Treasury yields brings down mortgage rates and helps the ailing housing sector. Freddie Mac’s 30-year commitment rate fell to a record low of 3.67 percent last week. It’s not the rate that’s deterring home purchases; it’s the lenders, having wisely determined that a good credit score and a 20 percent down payment are important after all. Not to mention potential buyers’ fears that home prices may fall further.

If Bernanke isn’t convinced of the need for more QE just yet and twisting the yield curve is cosmetic, what else could the Fed do at the conclusion of the June 19-20 meeting? More talk therapy.

"Bad news-is-good news" because the FED believes or thinks that they can continually talk up the markets.

Yet promises alone cannot satisfy the cravings of addicts (of anything).

And rising markets based on talk therapy looks likely indeed a candidate for “two events away from a 1 percent yield on the 10-year note”, that’s euphemism for a crash.

The more the market rises on the FED’s talk therapy, the greater the risks of a Dr. Marc Faber event.

Be very careful out there.

From Risk OFF to Risk ON: To Stimulus or Not?

Financial markets have become totally distorted and reliant on what the central bankers and policymakers does.

Following a heavy selloff just a few days ago, global markets have fiercely been rebounding on the prospects of “stimulus”. Thus the last few days have switched into a RISK ON environment.

From Bloomberg,

Asian stocks advanced for a third day, extending a global rally, and oil climbed on speculation policy makers will take steps to revive the slowing economy.

The MSCI Asia Pacific Index (MXAP) increased 1 percent by 9:45 a.m. in Tokyo, heading for its longest winning streak in two months. The Nikkei 225 Stock Average added 1.1 percent, while Standard & Poor’s 500 Index futures rose 0.3 percent. Oil gained 0.5 percent in New York, strengthening for a fourth day. The Australian dollar slipped 0.3 percent before a report showing the nation’s jobless rate may have risen.

European Central Bank President Mario Draghi said officials stand ready to act as the euro region’s growth outlook worsens. Federal Reserve Vice Chairman Janet Yellen said the U.S. economy “remains vulnerable to setbacks” and may warrant additional monetary stimulus. China delayed plans to tighten bank capital rules to ensure lending support to its economy, while Indian Prime Minister Manmohan Singh pledged to revive growth in Asia’s third-largest economy through infrastructure spending.

“The Chinese will take action to stimulate the economy and the Americans will similarly respond,” said Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management Ltd. in Sydney. “For a sustained rally, we need a period of stability where we’re not in a fire-fighting crisis mode.”

The MSCI All-Country World Index (MXWD) climbed 2.1 percent yesterday, the biggest gain since Dec. 20, and the S&P 500 jumped 2.3 percent. Two regional Fed bank presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, said yesterday the central bank should be prepared to take action if the economy deteriorates further.

In reality, financial markets have been desperately slobbering for stimulus, or differently said, financial markets have been PRESSURING policymakers to act.

And with expectations mounting, applied stimulus may or may not come in line with public’s clamor which may spur further volatilities. There is also a risk that stimulus may not arrive.

So far I would say that the Risk ON environment represents residues from the last stimulus.

And as one would notice, policymakers have now become the ultimate insider traders by having to chose winners and losers and by manipulating the financial markets directly and indirectly (the Risk ON environment is also in response to central banking’s signaling channel or communication to project policy intentions, and which seems like the Pavlov classical conditioning experiment through the famous Pavlov Dogs)

Let me drive a simple point. Hope must NOT be confused for action. There is no clarity yet on what path policymakers will undertake.

So do expect “more period of intense volatility on both directions but with a downside bias”

Be very careful out there.

Central Bankers Whets Wall Street’s Fetish For Inflationism

In a fiat-money regime, however, increases in credit and money are not a one-off affair. As soon as signs of recession appear on the horizon, public opinion calls for countermeasures, and central banks try their best to "fight the crisis" by increasing the fiat-money supply through bank-circulation-credit expansion, thereby bringing interest rates to even lower levels. -Thorsten Polleit

At a recent speech Non-voting FOMC member and President of Federal Reserve Bank of Dallas Richard Fisher said that he was puzzled with Wall Street’s obsession with Quantitative Easing[1],

I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing.

Such a statement signifies a bizarre denial of the impact to people’s incentives of the policies implemented by the US Federal Reserve.

In response to this statement Dr. Ed Yardeni posted on his blog charts which exhibited the tight correlations between actions of the S&P 500 (as well as the TIPs) and the Fed’s bond market interventions called as the Quantitative Easing.

Writes Dr. Yardeni[2]

Let’s review the market’s medical chart to see how it responded to the injections and withdrawals of the Fed’s monetary medicine:

(1) The S&P 500 rose 36.4% during QE-1.0, which spanned from November 25, 2008 through the end of March 2010.

(2) The S&P 500 rose 10.2% during QE-2.0 from November 3, 2010 through the end of June 2011. It rose much more, by 24.1%, if we start the clock on August 27, 2010, when Fed Chairman Ben Bernanke first hinted that a second round of quantitative easing was on the way.

(3) Operation Twist was announced on September 21, 2011. Since then, the S&P 500 is up 15.9%.

(4) Between the end of QE-1.0 and Bernanke’s speech on August 27, 2010, the S&P 500 fell 9.0%. Between the end of QE-2.0 and the beginning of MEP, it fell 11.7%.

There is an even better correlation between the Fed’s QEs and expected inflation implied in the spread between the 10-year Treasury nominal and TIPS yields.

The relevance and relationship between monetary policies and financial markets has not been limited to the United States but to the global marketplace.

As I have been pointing out global stock markets have been on a tear on central bank steroids.

I plotted the Bloomberg charts of the Phisix [PCOMP:IND] along with major world’s major bourses as the US S&P 500 [SPX:IND], Japan’s Nikkei [NKY:IND] and Germany’s DAX [DAX:IND] as futher exhibit to this tight relationship.

Since the bottom in October of 2011, the wave-like motions or undulations of three bourses have almost been in identical. The difference can only be seen in the degree of gains (where Germany’s Dax has outperformed the pack).

A near synchronized motion can also be seen in the Phisix, but to a lesser scale than the developed economy peers.

The point of the above is that any perception that sees actions of specific markets as demonstrating “fundamentals” will signify as patent misimpression or a misread—that will be eventually exposed once the tide of monetary liquidity subsides.

And a further point is that I am dubious of the impact of Operation Twist to the recent market run up.

Operation Twist which was announced in September[3] during the heat of the Euro crisis was designed to manipulate the yield curve. Then the US Federal Reserve announced that their goal[4] was

to sell $400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities. This will extend the average maturity of the securities in the Federal Reserve's portfolio.

By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities.

In other words, Operation Twist has been a modified QE with sterilization[5] functions (or the act of central banks to soak up new cash that would otherwise circulate in the economy).

Since sterilized monetary actions soak up freshly injected money, there won’t be similar narcotic effects on the markets as unsterilized interventions.

Instead I believe that other forms of interventions helped boosted global markets.

The US Federal Reserve opened foreign currency swap lines mainly targeted at the ECB and was also made accessible to many central banks at the end of November[6]. The announcement of the swap lines placed a floor on the plummeting S&P (as well as to major global markets) which at that time reeled from the eroding short term stimulant impact of the announcement of Operation Twist.

Also, the European Central Bank launched in December 22^nd of 2011, the first round of the massive rescue program by the infusion of €489 billion of credit[7] to the European banking system through the Long Term Refinancing Operation (LTRO) facility or repurchase auctions with expanded to maturity of 36 months[8] (typically during normal times LTROs had three month maturity[9]).

Both the Fed’s Swap Lines and the ECB’s LTRO operated like a 1-2 punch.

In addition, major interventions had been conducted during February of 2012, these had a follow through effect on the market’s speculative vim.

The Bank of Japan[10] along with the Bank of England[11] reengaged in more QE programs, while the ECB reopened the second round of LTROs which was met with record borrowings[12]. The second round of LTROs resulted to an expansion of the ECB’s balance sheets which has now topped the US Federal Reserve[13].

The asset purchasing program by developed central banks has been in conjunction with many major central banks slashing policy rates. This week India aggressively cut bank reserve requirements[14], while Brazil accelerated the reduction of policy rates[15].

This article has essentially captured today’s foundations which revolves around central banking actions

Reports the Dow Jones[16]

Central banking has become a global growth industry. But it is not just the size of balance sheets that's changed: so too have their composition. With rates close to zero, the U.S., U.K., Japanese and European central banks have pumped cash into the financial system. But each has chosen a different method - and will face different challenges when they try to shrink again. The growth in balance sheets has been startling: the combined assets of the four central banks will top $9 trillion by the end of March compared to $3.5 trillion five years ago, Deutsche Bank says. The European Central Bank's EUR3 trillion balance sheet is the biggest relative to the economy, at 32% of nominal euro-zone GDP, followed by the Bank of Japan with 24%, the Bank of England with 21% and the Federal Reserve with 19%. The BOE's balance sheet has expanded fastest in the crisis, more than tripling to GBP321 billion. But the change in composition and maturity profile of the balance sheets has been equally noteworthy. In January 2007, the Fed held $779 billion of U.S. Treasurys, of which 52% matured in under a year and only 19% in more than five years. Now, it holds $1.65 trillion of Treasurys, of which 57% mature in more than five years. Of the BOE’s GBP255 billion face value of gilts, 72% mature in more than five years, with 26% maturing in more than 20 years

Recently rumors of innovative QE via a reverse repo[17] have been floated. This is probably in designed as transition to the end of Operation Twist and could be part of the signaling channeled used by the Fed to see how the public would react.

Going back to the Wall Street’s fetish for QE, the answer is simple, the US Federal Reserve has been providing the narcotics and Wall Street became addicts. The inflationary dynamics has been accelerating because governments around the world has been working to protect an unsustainable welfare (and warfare) based political system that has been financed by debt and operates on the platform of cronyism.

As the great Ludwig von Mises wrote[18],

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

And the politics of inflation requires piggybacking inflationism one after another until the whole structure self-implodes.

---

[1] Fisher, Richard W. Not to Be Used Externally, but Also Harmful if Swallowed”: Projecting the Future of the Economy and Lessons Learned from Texas and Mexico Remarks before the Dallas Regional Chamber of Commerce Dallas, Texas March 5, 2012 Dallasfed.org

[2] Yardeni Ed Stocks & QE, March 8, 2011

[3] CNN Money Federal Reserve launches Operation Twist September 22, 2011

[4] Federal Reserve.gov What is the Federal Reserve's maturity extension program (referred to by some as "operation twist") and what is its purpose? September 21, 2011 Official statement FederalReserve.gov FOMC Press Release September 21, 2011

[5] Wikipedia.org Sterilization Capital account

[6] Wall Street Journal Real Times Economics Blog What Are Fed Swap Lines and What Do They Do? November 30, 2011

[7] Wikipedia.org Long Term Refinancing Operation (LTRO) European sovereign-debt crisis

[8] European Central Bank Press Release ECB announces measures to support bank lending and money market activity 8 December 2011

[9] European Central Bank, THE LONGER TERM REFINANCING OPERATIONS OF THE ECB, working paper series, May 2004

[10] See Bank of Japan Yields to Political Pressure, Adds $128 billion to QE February 14, 2012

[11] See Bank of England Adds 50 billion Pounds to Asset Buying Program (QE), February 9, 2012

[12] See Record Bank Borrowing from ECB’s Second Round LTRO March 1, 2012

[13] See ECB’s Record Balance Sheet Tops the US Federal Reserve March 7, 2012

[14] New York Times In India, Bank Moves To Stimulate Economy, March 9, 2012

[15] Bloomberg.com Brazil Accelerates Interest Rate Cuts Amid Signs of Lackluster Growth, March 8, 2011

[16] Dow Jones News Wires, Now, Sterilized QE? PrudentBear.com March 9, 2012

[17] Hilsenrath Jon 'Sterilized' Bond Buying an Option in Fed Arsenal March 7, 2012 Wall Street Journal

[18] Mises Ludwig von 3 Inflationism CHAPTER 13 Monetary Policy The Theory of Money and Credit, Mises.org